Commercial Loan Defaults May Triple as Rental Income Declines

Forget I ever said I wanted that 3bdrm in uws... I'm gonna look for some commercial bldgs to go bk and then go get me some cash flow... now that I will no longer put a bottom in NYCRE (residential)... I predict 69% decline :)

"I'm gonna look for some commercial bldgs to go bk and then go get me some cash flow"

w67: seriously? My Grand dad bought NYC RE in the 1970s.

Rents have already declined more than 5%. In terms of residential, the most in trouble in NYC will be Tishman with their top-of-the-market purchase of Stuyvesantown and Peter Cooper Village, and Archstone, bought at an inflated prices by Lehman. Oddly, if you look Archstone's properties on nybits.com, they have the highest rents and the highest vacancies. They seem to be resisting reality.

"Tishman with their top-of-the-market purchase of Stuyvesantown and Peter Cooper Village,"

Oh yeah, watching this one

Oh yeah, living in this one.

aboutready,

Are you a long time resident or a newer one?

yep... my dad bought in 1985... and never looked back :) Put us all through school and got me my RE bug... I used to negotiate with tenants as a teenager... now I do it for myself :)

let me see, if I can get something at 50% of replacement and 8x to 12x RR... stabilize tenants... build up some cash.. wait for residential to fall further then get my 5bdrm on CPW at 67th.... booh! Raahhhh!.

FYI dwell, it has been my experience Commercial prices adjust much quicker and residential.... something about kicking out a family over the holidays and all the resid. brokers not facing reality puts some "dirt" into the workings of the bankruptcy system. :)

meant "than"

Newer one, almost five years. Thought we'd be out by now.

Investors in commercial seem to be much faster to walk away, once the walking starts. Which bank was stupid enough to issue the debt for PCV/ST? Idiocy, expecting a 7-8% (I don't recall the exact numbers, but they were way off) turnover on rent stablized apartments when 3-4% is the norm. This is one hearty elderly population.

hmmmm...VORNADO and BOSTON PROPERTIES???? those make up like 1/2 ny commercial real estate. they are @#$@#$@# in my opinion.

aboutready.... why won't they just kick the bucket... .my funeral stock is tanking it's like Y2K all over again... :)

w67th, maybe TS could then quit increasing my rent. Sad to hear about your funeral stocks, seems like it would be a growth industry in these stressful times. Maybe you should hedge with some home health care providers stock.

"Maybe you should hedge with some home health care providers stock."

LMAO.

who thinks the REIT in 2009 will take the spot of the financials? all trade in single digits and some nationalized. Could Vornado be a Lehman? General Growth was the Bear....

Alas it all comes back to the Lehman bankruptcy. Turned a moderate slowdown into a worldwide crisis. As soon as lending stops, everything collapses. Not just leverage - EVERYTHING.

Bush II - the most incompetent administration ever in the history of the United States.

Who's the worst: Christopher Cox, Hank Paulson, Condoleeza Rice, Donald Rumsfeld, Dick Cheney...?

I still think Barney Frank takes the cake... he's still trying to blame it on everyone else...

You should thank Barney Frank. He's the one who insisted that TARP be allowed to recapitalize banks. Without that, we would be far worse off than we currently are.

all... LMAO!

http://www.calculatedriskblog.com/2008/12/wsj-commercial-property-investors-seek.html

Comment from Calculated Risk blog:

"The article suggests there is a concern that some owners will not be able to refinance because of the credit crisis, even though their properties have strong positive cash flow. But that seems like a liquidity issue for the Fed and the banks, and doesn't seem to require a bailout from the Treasury.
I don't see the argument for a bailout."

Steve,

was it a moderate slow down or did the house of cards begin to tumble? I mean, not only did they (wall st) over leverage, but the underlying assets (high risk mtgs) were of poor quality/low value.

I think that if the underlying assets where of medium to high quality, the over leveraging wouldn't have caused so much damage.

clarification: not that the underlying assets were of poor quality, but rather they were over appraised & over valued; then, on top of that, they were leveraged 40 to 1. So, over appraisal plus high leverage equals house of cards.

> You should thank Barney Frank. He's the one who insisted that TARP be allowed to recapitalize banks.
> Without that, we would be far worse off than we currently are.

Or not in the mess in the first place...

dwell, if it weren't for mark-to-market accounting, none of this would have happened.

M2M works for assets held for trading. Not for assets held long-term. If you put your house on the market today & no one buys it, is it worth $0?

No. It may not be worth $1 million, but it's certainly not worth $0. M2M distorts that.

So there's part 1. Part 2 was allowing Lehman to go under. Look at any chart - stock markets, interest rate spreads, money supply - from September 17 onward, tell me what happened.

They all read: heart attack.

Was there too much leverage? Yes. Was some pain necessary? Yes. But AIG is being unwound slowly precisely so as not to shock the system. Too bad they didn't learn that before they caused Lehman's collapse.

And "that there was no buyer" is rewriting history. Look at Paulson's quotes beforehand. "No government money" was his mantra.

The bankers modeled this thing up for "perfection" or until the next sucker came along with the ability to add more leverage... the asset is sound it's just a pissing match between the equity and all the debt tranches in backruptcy. I don't know if there is any super-secured senior debt... but that's gonna be your new "owners" when all is said and done.... it'll probably take a few iterations in BK court.

I just hope Vornado and the other REITS don't hire Dimas to torch their "assets" for fire insurance purposes... I remember when the south bronx burned ... ahhh the good old days ... and hence my "burn..... burn" song.... but I digress....

> If you put your house on the market today & no one buys it, is it worth $0?

There is a difference between no one buying your specific house, and there not being a market for an asset...

Just because someone did not want to buy my treasury for $1 trillion doesn't mean there is no market for treasuries...

So, why, oh why, has the gov not yet ditched M2M? Everyone says M2M is destructive, so why do we still have it? Because our gov is a ass?

"There is a difference between no one buying your specific house, and there not being a market for an asset..."

Not really. In both cases it means there is no price discovery, but that does not mean that the price is zero.

M2M was instituted for trading accounts in the early 1980's. It makes sense because the purpose of the asset is to dispose of it in the short-term. But if you plan on holding the asset for the medium- to long-term, today's nonexistent market makes no difference. What makes a difference is the net present value of future cash flows, which would, of course, be adjusted depending on how the asset performs.

Right now mortgage-backed securities are being priced as though every single mortgage in the country would default. That makes no sense, and it leads to very wide swings and extreme volatility in bank earnings, which make banks look unstable when they are not.

It is a stupid rule. Just like getting rid of the uptick rule was stupid.

Which is why Christopher Cox gets my vote for the most incompetent member of the Bush Administration, after "Brownie."

Think of it this way: why would anyone ever invest in anything if they thought there was an excellent chance that it would eventually be marked down to zero?

For no reason.

> Not really. In both cases it means there is no price discovery, but that does not mean that the
> price is zero.

Yes, really...

You don't need your specific asset to be bought for there to be price discovery, you only need one in the class to get it. If your neighbor's house is bought, you have price discovery.

"It is a stupid rule. Just like getting rid of the uptick rule was stupid."

So, why the heck do we still have it??????????????

If they can vote & pass TARP, can't they change M2M?

Yes they can just change it. It was in the TARP legislation. And they can just change the uptick rule, too.

That's why Cox has my vote.

"If your neighbor's house is bought, you have price discovery."

Not really. You're assuming that all the houses are the same, and they may not be.

"you only need one in the class to get it."

Alas, each and every one of these securities is different. Much more different than your neighbor's house is to yours, on the whole, if you've ever seen what's packaged inside of them.

I have. They tried to apply the "spread the risk" philosophy of reinsurance to securitizations, but it didn't work. Reinsurance can be priced actuarily. Facultative reinsurance - a specific policy for a specific risk - is calculated on a per-policy basis. These mortgage-backed securities have too many variables to do that, which is why no one wants them: it's not that the risk was spread, it's that it became incalculable.

Huge difference. That's why there is no market. Yet 95% or more of all mortgages are currently performing. That's a far cry from 0%.

> Not really. You're assuming that all the houses are the same, and they may not be.

If you are assuming that all must be exactly the same to be considered "market" for M2M, then you would be mistaken...

> Huge difference. That's why there is no market.

Not correct.... there is no market not because each is individual, there is no market because no one wants any of them.

That is an important distinction you are missing...

For all M2M's fault, changing it would be a disaster. The last thing we need is MORE opaque disclosure from banks. M2M is one of the few things that keeps them hone..err...somewhat honest...

I agree with honesty... LONG TERM.

All the honesty is killing us right now. I'll take a little lying if it gets consumers spending right now...

For all M2M's fault, changing it would be a disaster. The last thing we need is MORE opaque disclosure from banks. M2M is one of the few things that keeps them hone..err...somewhat honest...

Level 2 assets, which could be equally as toxic as level 3 and marked to some sort of internal proprietary modeling system that give these assets much more value than reality.For many of these firms and banks a mere 5% writedown in their Level 2 book renders them insolvent. This is where a lot of that nasty commercial resides.The Level 2 numbers are so staggering that even a 7.5% writedown across the small group banks would equal the total write downs by all banks worldwide to date!

" I'll take a little lying if it gets consumers spending right now."

I never understood this. In a recession, the last thing consumers should do is spend recklessly. Consumers should instead be tightening their belts to cushion the blow if they lose their job.

If excessive spending and debt got us into this mess, the solution can't be to spend more and take on more debt.

"5% writedown in their Level 2 book renders them insolvent"

All the more reasons for better accounting and less financial engineering. These losses are real. Not recognizing them early on puts you into a Japanese style "lost decade". Which is where my money is for where we are headed.

We should M2M... NYC RE prices :)

All the more reasons for better accounting and less financial engineering. These losses are real. Not recognizing them early on puts you into a Japanese style "lost decade". Which is where my money is for where we are headed.

Exactly it wasn't till the Japanese government forced banks to fully disclose their toxic assets and write them down were they able to get healthy again!!

In my old banking days, if our participation looked shaky... we would need to mark it as "special mention" and our books would be audited and if warranted the work-out dept. called in and regulators called in. In the late 90's (this is where it gets fun...) we started doing this thing called CDS (credit default swap) - which essentially got us a pass from the regulators i.e. no additional capital was required for our impaired bank debt... and no-one ever questioned it b/c (drum roll please) our counterparty was a AAA rated (ala AIG or Lehman). LMAS... it's as if someone decided "risk is proportional to return" didn't exist anymore.... this just let "Bankers" not give a damn about credit risk as (for a cost) it could be eliminated completely.

Let me take more of those yellow ones.. :)

Agree with jgr... need to M2M and quick to get rid of this "double flusher" depression.... :) Hope I don't offend someone... but I just can't help myself... :)